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Archive 2011

  • 01.04.2011

    The Value of Farmland - Expected Farmland Prices in Ukraine after lifting the Moratorium on Farmland Sales

    (Code:AgPP_32)

    The absence of a fully-fledged farmland market has been considered as a stumbling block in developing of the agricultural sector in Ukraine. The discussion about the moratorium on farmland sales in Ukraine seems to come to an end. The new government in many official statements declared its commitment to lift the moratorium on farmland trade by 2012. This decision would affect the value of farmland that in turn will impact the productivity and future growth prospective in the sector. 

    Some argue that farmland is undervalued in Ukraine. Given no land market, only normative state methodology is applied to appraise average farm land values. However, the approach and the indicators behind this methodology cast doubts on the accuracy of the normative estimates of farm land values. Proper estimation of the farmland value requires local knowledge of demand and supply factors behind the price formation. Residual income from land that is typically used in relevant calculations has to be coupled with specific local condtions, in particular actual interest rates and productivity growth expectations. 

    In this paper we apply the income capitalization approach to farmland price estimation. Based on the actual land productivity (gross margins) for Ukrainian farms over the period of 2007-2009, we conclude that a hectare of arable land would be traded from 1500 UAH (Zakarpattia) to 5500 UAH (Kirovohrad). If the sub sample of top-25% performing farms was to be considered, the maximum land value will increase to around 6800 UAH or 860 USD. Of course, in a market economy the bidder with the highest price would get the land. Non-economic considerations are beyond the scope of our analysis but behavioural aspects are usually influencing sellers and buyers of land. Real future farmland prices may therefore deviate from “rational” prices. In some cases lower and in some cases higher than our estimates. Our results are consistent with global farmland prices that we received from a survey covering about 370 farms around the world conducted in December 2010. Our estimates, however, fall in the lower end of the world farmland purchasing prices that vary from 100 USD/ha in Eastern Ghana to over about 105 000 USD/ha in Flevoland (Netherlands).

    Such a relatively low level of expected farmland values in Ukraine, however, will remain as long as farming and input and output marketing in Ukraine remains less efficient compared to best global practices. Regardless of the agronomic quality of farmland the most important factors of farmland price growth are current and future expected farm productivity levels as well as capital market conditions (access to capital and interest rates). The expected limited initial competition on the farmland market after lifting of the moratorium and the asymmetry of information of sellers and buyers of land will most likely lead to low initial farmland prices.

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